October 5, 2017

Congressional Republicans Ready Fiscal Year 2018 Budget Resolution; Tax Reform Talks Continue

Both the House and Senate were busy this week grappling with a fiscal year 2018 budget resolution that, if finalized by Congress, would set the stage for consideration of a massive GOP tax-overhaul plan.  The function of the budget resolution – which is technically non-binding and does not require the signature of the president – is to establish a topline spending figure for the upcoming fiscal year.  The resolution also may include “budget reconciliation” instructions, which allows Congress to make changes to both mandatory spending programs (entitlements) and tax policy.

At press time, House lawmakers were debating a budget resolution (H Con Res 71) that would set overall discretionary funding for fiscal year 2018 at $1.132 trillion.  Of that total, $621.5 billion would be set aside for defense programs with the remaining $511 billion reserved for non-defense discretionary spending.  Notably, the House measure would bust the Budget Control Act’s (BCA) fiscal year 2018 spending limits for defense programs by over $72 billion while trimming non-defense funding by $5 billion.  In order for the defense increases to take effect via enactment of a subsequent appropriations bill, Congress would need to pass legislation modifying the terms of the BCA.

The House budget also directs 11 committees to produce legislation that would reduce the deficit by a combined $203 billion over 10 years.  While individual committees would have some level of discretion regarding which programs to cut, the document assumes roughly $1.5 trillion would be saved by enacting changes to Medicaid and other health programs.

With regard to taxes, H Con Res 71 includes reconciliation instructions that could be used by congressional Republicans to advance a rewrite of the tax code.  Under reconciliation, the Senate would be permitted to pass a tax-reform package with a simple majority.

Across Capitol Hill, the Senate Budget Committee was expected to approve on Thursday its own budget resolution that would adhere to the BCA’s defense spending cap.  The upper chamber’s measure mimics the House resolution’s non-defense spending cut of $5 billion.

Similarly, the Senate resolution includes reconciliation instructions allowing for a subsequent tax overhaul.  In contrast to the House measure, the Senate version doesn’t specifically call for cuts to the Medicaid program, though does assume trillions of dollars in mandatory spending reductions over 10 years.

Looking ahead, Republican leaders in the House and Senate will need to reconcile the differences in their competing budget resolutions.  Without a final resolution on the books, GOP tax reforms efforts would be unable to advance.

Tax Reform – SALT Deduction Remains Key Sticking Point for California

One week after releasing a framework for comprehensive tax reform, Republican leaders continued to negotiate the details of the plan.  While the GOP appears united on a number of key reform features, House and Senate Republicans are split on several issues, including the size of proposed tax cuts, whether those cuts should add to the federal deficit, and which tax breaks to eliminate.  For its part, CSAC has urged members of the California congressional delegation to preserve two key aspects of the tax code that benefit counties, namely the tax exemption for municipal bond interest and the deduction for state and local taxes (SALT).

While the reform blueprint did not explicitly call for its repeal, GOP leaders have targeted the SALT deduction as a means to help offset the overall cost of the tax package.  However, there has been significant pushback against proposals to eliminate SALT, particularly from GOP lawmakers in higher tax states such as New York, New Jersey, and California.  In fact, Republican lawmakers are now backing away from a full repeal and are considering several alternatives to limit the deduction.  Current proposals include means-testing SALT, allowing filers to claim either the deduction for property or income taxes, or turning the deduction into a nonrefundable credit. 

With regard to municipal bonds, it remains unclear if Republican tax writers will seek to eliminate or cap the exemption on interest.  Based on discussions with key congressional offices, there appears to be sufficient support for preserving this tax benefit and early indications are that there will be no changes to the status of muni bonds in a forthcoming tax bill.  CSAC will continue to work with NACo, the Government Finance Officers Association (GFOA), and other members of the Americans Against Double Taxation coalition to protect county interests in any tax-reform measure.

House Agriculture Committee Approves Forestry Reform Legislation

On September 4, the House Agriculture Committee advanced legislation – the Resilient Federal Forests Act (HR 2936) – that aims to increase timber production and reduce the risk of wildfires on National Forest System lands.  The bill would accomplish this largely by streamlining the environmental review process for certain projects.  The legislation, which was approved by the Natural Resources Committee in June, also would establish a procedure for requesting a wildfire disaster declaration on federal lands.  While HR 2936 proposes to limit judicial review of forestry projects, the measure does not include some of the more severe restrictions that were in previous iterations of the bill.

With regard to the Secure Rural Schools (SRS) program, the measure would expand eligibility under Title III to include law enforcement patrols, training, and equipment purchases as eligible expenses.  This would help rural counties dedicate critically needed resources to combat illegal marijuana grows on forested lands.  However, it should be noted that SRS is currently expired, and without an extension, this provision would be of minimal value.

The measure has now been cleared for consideration before the full House chamber, but GOP leaders have yet to commit floor time to forestry reform.  For its part, CSAC is continuing to work with the California delegation, as well as other key members of the House and Senate, to improve federal land management practices.

Children’s Health Insurance Program

This week, committees in both the House and the Senate approved their respective versions of legislation that would reauthorize the Children’s Health Insurance Program (CHIP).  While CHIP technically expired on September 30, states generally have sufficient funding to continue financing their programs after that date.  With regard to California, the state is expected to exhaust its CHIP funding by January 1, 2018.

In the Senate, the Finance Committee cleared on a nearly unanimous vote a five-year CHIP renewal bill that would gradually phase out the Affordable Care Act’s (ACA) higher federal contribution for CHIP coverage.  Under the legislation, the current two-year, 23 percentage point boost in the federal contribution (from 65 percent to 88 percent in California) would be maintained through fiscal year 2019.  The federal contribution would then return to the original 65 percent match by 2020.

It should be noted that Senate leaders have not yet identified how they will pay for their CHIP reauthorization bill.

Across Capitol Hill, and in contrast to the generally bipartisan nature of discussions in the upper chamber, the House Energy and Commerce Committee cleared its GOP-sponsored CHIP measure on a largely party-line vote.  Approval of the bill followed a long and contentious debate during which time panel Democrats assailed the legislation’s spending offsets.

Under the bill, five years of renewed CHIP funding would be financed by making various administrative changes to the Medicaid program, as well as by adjusting Medicare premiums for seniors who earn more than $500,000 per year.  The legislation also would take over $6 billion from the ACA’s Prevention and Public Health Fund.

FAA Reauthorization

This week, the chairman of the House Transportation & Infrastructure Committee, Representative Bill Shuster (R-PA), renewed calls for the House to take up a long-term reauthorization of the Federal Aviation Administration (FAA).  Although Congress just passed a short-term extension of federal aviation programs that runs through next March (HR 3823; PL 115-63), Shuster is aggressively promoting the need for action on his six-year FAA bill.

Get more on the local impact of the FAA reauthorization at this link.

Entitled the 21st Century Aviation Innovation, Reform, and Reauthorization Act (HR 2997), Chairman Shuster’s legislation would authorize increases in funding for several key local aviation programs, including the Airport Improvement Program (AIP) – growing from $3.52 billion in fiscal year 2018 to $3.99 billion by fiscal year 2023.  The bill also would provide a significant funding boost for the Essential Air Services (EAS) program, while keeping funding for the Small Community Air Service Development Program (SCASDP) at current levels.

Although the T&I Committee cleared HR 2997 in June, the legislation has remained in a holding pattern due to ongoing disagreements over provisions of the bill that would transfer air traffic control operations from the FAA to a nonprofit corporation.  As of this writing, it remains unclear if Chairman Shuster and GOP leaders will be able to secure the necessary votes to advance the long-term FAA bill on the floor.

Of particular interest to California’s self-help counties, Representatives Alan Lowenthal (D-CA) and Grace Napolitano (D-CA) are planning to offer an amendment to the bill that is designed to protect states and localities from federal government intrusion regarding the use of their general sales tax revenues.  Specifically, the amendment would clarify that local sales tax measures are generally not subject to provisions of federal law that require the proceeds of certain taxes to be spent for aviation purposes.  The amendment is supported by CSAC, as well as other state and local interests in California.

It should be noted that the impetus for the amendment is a 2014 FAA ruling that requires States and local governments to spend the proceeds of any aviation-related tax – those derived from excise taxes and local sales taxes – on airport uses only.  The FAA’s ruling amounts to a reinterpretation of a particular section of federal law that addresses how the proceeds of aviation fuel taxes are to be spent.  Incidentally, the Conference Report to the law in question (PL 100-223) states that the requirement is “intended to apply to local fuel taxes only, and not to other taxes imposed by local governments, or to state taxes.”

It is estimated that the FAA’s policy reinterpretation will mean a loss of over $100 million for the State of California and its local governments.  Nationwide, a recent study suggests that state and local governments will lose roughly $190 million a year under the FAA rule change.  Furthermore, because sales taxes on aviation fuel are not segregated from other taxable sources, state and local governments will need to implement an extensive new tracking system(s) in order to comply with the FAA’s policy.

Committee Approves Border Security Legislation

On September 4, the House Homeland Security Committee approved border security legislation – the Border Security for America Act (HR 3548) – that would, among other things, authorize $10 billion for a border wall.  The bill, which was approved along party lines, also would provide $5 billion over the next four years for border infrastructure upgrades and additional staffing at border ports of entry.  Notably, the committee rejected every Democratic amendment, but the panel did adopt an amendment – offered by Congressman Will Hurd (R-TX) – that would prevent wall construction in areas where natural terrain, natural barriers, and remoteness of a location render a wall impractical or ineffective.

The full House is expected to consider and approve HR 3548 later this year, although the measure is likely to stall in the Senate, where it will require 60 votes to break a Democratic filibuster.  In an effort to gain some bipartisan support, GOP leaders may consider attaching provisions that would protect recipients of the recently rescinded Deferred Action for Childhood Arrivals (DACA) program.  However, it is unclear if this will ultimately be enough to encourage Democrats to support the bill.